David Einhorn Decreases Long Exposure as Risks Grow

David Einhorn on Greenlight Capital Re, Ltd. (NASDAQ:GLRE) conference call this morning mostly echoed comments he made in his recent his Q2 letter, but he had some new information/comments.Below are Einhorn’s remarks from today along with some related commentary from his recent letter to investors (note: italics indicate excerpts from Q2 letter).

David Einhorn gains with Apple and Micron’s strong results

Our loan portfolio returned 13.9% as Apple Inc. (NASDAQ:AAPL) and Micron Technology, Inc. (NASDAQ:MU) led the way with strong operating results. Apple’s earnings per share grew 15% last quarter and the company is forecast for more of the same also raised its capital return plan by 50% to $90 billion. Micron’s earnings exceeded expectations as last year’s DRAM memory price increase helped steady. These long positions we established in the first quarter Altice SA (AMS:ATC), Resona Holdings Inc (TYO:8308) (OTCMKTS:RSNHF) and Sunedison Inc (NYSE:SUNE) also contributed as Company specific events made positive progress.

Finally, positioning we established last year in OIS International appreciated as the Company spun-off its Accommodations business, which now trades publicly as severe. We continue to hold positions in these companies and believe that each is cheap on an absolute basis and has further value to be unlocked through shareholder friendly management teams. Our short portfolio detracted a bit less than the market gain this quarter as an unusual amount of takeover activity affected a number of our short positions.

Einhorn in Q2 letter

Oil States International, Inc. (NYSE:OIS) ($98.60 to $114.15) / Civeo Corp (NYSE:CVEO): OIS completed the spinoff of its legacy accommodations segment, now called Civeo (CVEO). The combined OIS/CVEO share price appreciated as investors re-rated the two businesses closer to their respective fair values. The shares ended the quarter at $114.15 on an old OIS-equivalent basis.

David Einhorn: Short portfolio

The last time we experienced takeover season in our short portfolios back in 2006 and 2007 when a number of our shorts were taken out in succession. In the current environment, acquirers are willing to overlook problems in companies, because in expensive debt financing makes deals EPS accretive in the near term. Our macroposition slightly detracted from quarterly results as our front sovereign onshore and our end shore cost us more in our goal position contributed, David Einhorn noted in the Q2 letter.

Einhorn in Q2 letter

The short portfolio lost a bit less than the market despite a rash of takeover activity that infected a number of positions. Costly takeovers of our shorts appear to be a cyclical phenomenon: We went from 1996-2003 without incurring a single material loss due to a takeover. Then in 2006-2007 we had a number of our shorts taken over in rapid succession, the most costly being Medtronic, Inc. (NYSE:MDT)’s $4.2 billion acquisition of Kyphon at a 32% premium over Kyphon’s already lofty share price. In reviewing historical takeovers of our shorts where we lost money, almost none proved to be good deals for the acquirers.

Things got quieter again for a few years but now takeover season has returned and is again causing losses in our short portfolio. Companies we are short often have serious problems of which the boards and management are probably aware. This makes them more eager than usual to sell at any sort of premium. The prospective buyers ought to discover these problems during due diligence, which should make them walk away. But in the current environment, debt financing is so inexpensive that acquirers can pay premiums and have the deals be accretive to EPS, making them more willing to overlook or ignore any problems they discover.

Takeover season has returned and in a new twist, the buyers’ stock prices are also advancing in response to announced deals, enabling companies, including some of our shorts, to see gains as acquirers – even of other troubled companies.

David Einhorn: Bubble in momentum stocks

We had a difficult time finding new investments this quarter, despite a 13.9% increase in the loan portfolio, we ended the quarter at 114% gross loan about 3% less gross loan and we were at the beginning of the quarter this reflects trimming of a number of appreciated positions. The investment portfolio ended the quarter 48% net loan, which is down about 4% from the beginning of the quarter. As the market continues to rise in the phase of conflicting economic data, global unrest and [indiscernible] wanting overdue FED exit from quantitative easing, we remain cautiously positioned.

From Q2 letter

In our last quarterly letter, we wrote about the bubble in momentum stocks, most of which are in the technology sector. The media latched onto a single sentence embedded in a lengthy discussion about ‘cool kid’ stocks and suggested that we were declaring all technology stocks to be in a bubble. Nothing could be further from the truth. Many of our largest long positions are in technology, and we are not holding them with a cynical view that we want to play a bubble.

In the month of July, our investment portfolio lost 2.6%. Despite a positive result from Apple, we had a large number of small losses throughout the rest of the portfolio that summed up to losing money. None of the losses were large and the real problem was a lack of other significant winners.